When the land's worth more than the trees

By Amy Hsuan, The Oregonian

From: http://www.oregonlive.com/
December 26, 2009, 9:00PM
Part one of two



Torsten Kjellstrand, The Oregonian Travis Miller works on his family’s ranch near Glenwood, Wash., just southeast of Mount Adams. While many make a living in the woods in the area, Miller’s family also depends on forests, where their cattle pasture in the summers. Last year, Miller was one of several people from the area who traveled with the nonprofit Mount Adams Resource Stewards to New England to see how community forests work. GLENWOOD, Wash. -- For 100 years, Ponderosa pines nourished this logging town of 500 nestled along Mount Adams' southeastern flank. But in the past few years, a change has taken over the woods, unsettling residents and their relationship with the land.

Here and throughout the Pacific Northwest, investors have been buying millions of acres of forestland, betting on big payouts for their clients -- pension funds, university endowments and foundations.

Today, timber investment management organizations and real estate investment trusts represent the largest private landowners in Oregon and across the country.

Over the past decade, investor-owners have used one big advantage as they've quietly replaced traditional forest products companies: They don't pay corporate taxes. This month,Weyerhaeuser, the nation's last major publicly-traded integrated forest products company, announced it will become a real estate investment trust next year.



Torsten Kjellstrand, The Oregonian The nonprofit Mount Adams Resource Stewards has found ways to tap the forests for new products and more work for residents. In 2007, the nonprofit raised $300,000 from private and federal grants to create a new business out of low-value, small-diameter wood from forests surrounding Glenwood, Wash. With timber prices flatlining and real estate values rising, many private forestland owners are shifting their gaze to building homes rather than growing trees. Landowners elsewhere in the country, under pressure to maximize returns, have looked to convert forests into subdivisions and resorts as trees become less valuable than the land they occupy.

The unprecedented change in land ownership raises concerns about the impact on wildlife and natural resources, as well as the increased costs of protecting residents from forest fires. Nationwide, about 1 million acres of forestland are lost to development every year. In the Pacific Northwest, it begs the question: What does the future for forestry look like in a region defined by it?

In timber-dependent towns like Glenwood, the change carries the fear of the unknown. As landowners come and go quickly, their financial decisions could create a patchwork of forests and rural sprawl.


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"Without the land, there's nothing here," says forester Jay McLaughlin, who lives in Glenwood. "If we don't keep places like this going, they're going to end up being playgrounds for the rich or turn into ghost towns."

Investors take root
Institutional investment in timberland nationwide soared from $1 billion in 1990 to $40 billion in 2007, according to Yale University and other sources.

"When I first started in this business in the '90s, my job was as a missionary trying to explain why forestlands were a good investment," says Matt Donegan, co-founder of Forest Capital Partners, one of the nation's largest timber investment management organizations, which has a Portland office. "Now, people are seeking me out."

Between 1996 and 2007, 84 percent of the nation's 70 million acres of privately-owned industrial forests changed hands, according to a survey by Portland-based consultants U.S. Forest Capital.

"It's an astonishing rate," says Tom Tuchmann, the firm's president and a former adviser on timber issues to President Bill Clinton. "Increasingly, we're seeing even more parceling off."

Starting in the 1990s, federal limits on logging to protect wildlife species cut off a major supply of timber in the Pacific Northwest. With the constricted supply, timber prices shot up and private forests rose in value.

But as the bulky timber giants found themselves losing ground to competitors from Argentina to New Zealand, they narrowed their focus to operating mills and manufacturing wood products. In Oregon, timberland owners such as Boise Cascade and Georgia Pacific sold all their land -- hundreds of thousands of acres. Others fell into bankruptcy.

Wall Street snapped up the properties. Pension funds, endowments and foundations found timber to be a safe place to park billions of dollars as a hedge against inflation. Since 1986, timberlands generated annualized returns of 14.5 percent, according to the National Council of Real Estate Investment Fiduciaries' Timberland Property Index.

Insurance and title companies, which invest policyholder premiums to generate returns, also opened real estate divisions. Fidelity National Financial, based in Florida, now owns 520,000 acres of Oregon forestland.

Around Glenwood, Hancock Timber Resource Group, a subsidiary of Manulife Financial Corp., is now the largest landowner. It owns a half-million acres across Washington and 140,000 acres in Oregon.

"Over the years, in order to maintain the insurance business, we've had to learn how to manage money," says John Davis, acquisitions manager for Hancock, which has an office in Vancouver. "There's a duality to the business."


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A jigsaw forest

From a bird's-eye view, one owner's land is indistinguishable from the next. But on a map, the roughly 111,000 acre tract formerly known as the Klickitat tree farm, looks like a jigsaw puzzle. The property has seen more landowners since 2000 than in the entire 20th century. In the past, long-time wood products companies like St. Regis, Champion and International Paper logged the forest 25 years at a time.

Now, investor-owners sell parcels every two years. In 2007, a group of six investors bought 82,000 acres. Last fall, one of the investors sold his 12,300 acres to another investment firm, now the sixth owner of the property.

"What happens when you chop the land into little chunks?" says George Hathaway, a former rancher who grew up in Glenwood. "You don't have a forest anymore."

Timber investment management organizations and real estate investment trusts, which have expanded like wildfire, have been hit by the recession along with others in the forest products industry. They wield a fundamental advantage: They don't pay corporate taxes, which range up to 35 percent. Instead, their shareholders or investors pay capital gains taxes of 15 percent based on dividends.

This month, Weyerhaeuser's board of directors approved the company's transition to a real estate investment trust for those reasons, says Bruce Amundson, spokesman for the Federal Way, Wash.-based company.

Clark Binkley, managing director of Boston-based International Forest Investment Advisors, says the tax advantages for investors have made it hard for companies to compete.

"Nobody said 'we don't want to have any integrated forest products companies,'" he says. "But now it's basically impossible to operate an integrated forest products company in the U.S."


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When it comes to big-ticket purchases, investment managers can raise millions of dollars through their investors, while companies must go to the bank and pay interest. Plum Creek Timber, based in Seattle, converted to a public real estate investment trust in 1999. Today, it's the nation's largest private landowner with more than 7 million acres, including 430,000 in Oregon.

"The primary reason why Plum Creek became a real estate investment trust was so we could gain access to capital to grow the company," says spokeswoman Kathy Budinick.

In Oregon, privately-held family-owned companies still hold millions of acres. But they don't have the same purchasing power.

"The timber investment management organizations can go to their investors and raise $100 million with no debt, no interest," says Steven Zika, CEO of Portland-based Hampton Affiliates, a family-owned company with 85,000 acres in Oregon. "Within the last five years, we couldn't make enough cash from selling logs to make the interest payment."

Tough economics
Jay McLaughlin's first glimpse of Glenwood was on a calendar, which lured him and his wife here for teaching jobs in 1998. McLaughlin left to earn a degree in forestry from Yale University in 2000, then moved right back.

The 37-year-old worries about the fate of the town, less than an hour from Hood River. Its mill closed in 1927.

"What's the future for a place like Glenwood?" McLaughlin asks.



Glenwood’s mill closed in 1927, but the town has long been dependent on the forests for economic survival. Today, logging and forestry continue to be a major source of employment through investment managers who have purchased timber land with cash from institutional investors. In the past, traditional companies owned land to supply timber to their mills. They invested in research to find more efficient ways to grow trees, their primary business.

Investment managers have an objective to maximize returns for their investors. And as the timber industry grows tougher, selling land for development has become an opportunity for all forest owners. In industry talk, it's called "higher and better use."

A growing gap in the economics of timber versus housing development ramps up the pressure. The going price for property at timber value in Oregon is $2,000 to $4,000 an acre. If it's sold as a home site, it's worth $30,000 an acre.

"There's a greater pressure to maximize returns and to find alternative revenue," says Ray Wilkinson, executive director of Oregon Forest Industries Council, a trade group that represents the state's largest private landowners. "The new ownership structure has investor expectations that are different from traditional forest products companies."

But hard times for the past several years mean even family-owned companies feel pushed in that direction.

"It takes 40 to 50 years to grow a tree," says Zika, of Hampton Affiliates. "With the recession, it's tough to resist selling a tract. We do more of it in tougher times."

In Oregon, where land use laws prohibit much development in forestlands, the pace of it has been far slower than elsewhere. In Montana, large homes speckle forests. In Washington, the loss of forests has been 10 times faster than Oregon, according to preliminary studies by the Oregon Department of Forestry.

Homes still crop up in Oregon. Between 2000 and 2005, more than 6,000 homes were built on land zoned for forest uses. With more people living in the woods, some worry about the cost of fighting wildfires, most of which are caused by humans. The closer the fires are to homes, the more expensive they are to fight.

"It's going to be a slow filling-in," says Gary Lettman, economist for the forestry department. "But if you put a house out there, it's going to be much more difficult to manage for wildlife and forestry."

Buying a forest
In Glenwood, a handful of new homes has sprung up, but the newcomers highlight a bind for rural communities. They bring fresh faces, but with second homes, they tend to visit only on weekends or holidays.

Across the country, development in forests forges once-unimaginable alliances between conservationists and the forest products industry. Now, the two sides work together to preserve "working" forests, pitching for financial rewards for tree-growing.

Biomass energy markets, which will make use of waste wood, and tax incentives for providing wildlife habitat, clean water and air could soon be on the horizon.

In Minnesota, forestland owners are paid recreation access fees of $8 an acre, which means $2.5 million a year for Forest Capital Partners, which owns 300,000 acres there.



Torsten Kjellstrand, The OregonianThe Shade Tree Inn is one of two main businesses in Glenwood, which has lost many businesses over the years as the forest products industry has declined. The inn’s restaurant serves as a defacto community center for the town. "Sometimes the gap between development and timber is too big," says Donegan, who hopes to see trees become more viable. "But we have to ensure our working forests are going to survive and we need to find a way to give forestland owners some rewards."

In 2003, McLaughlin started a nonprofit, the Mount Adams Resource Stewards. At Yale, he learned about communities in New England buying forests. Last year, he took a group of residents from the surrounding area to explore several projects in Maine.

"It really opened my eyes," says Hathaway, who sits on the nonprofit's board. "If we can buy this land, we can keep that money right here in Glenwood, and it doesn't have to go to Wall Street."

The new landowner around town is a timber investment management organization called Conservation Forestry, which sells lands to interested nonprofits -- a rising trend and a new opportunity for Glenwood. But to buy a forest, McLaughlin will have to come up with a lot of money.

"Everything has to be on the table right now," he says. "There is so much land changing hands, there's pretty radical things happening on the landscape. We need pretty bold ideas."

Amy Hsuan: 503-294-5137

Stimulus billions fund rural broadband Internet

For businesses in rural America, fast Internet connections remain a scarce luxury. A $7 billion stimulus program aims to narrow the digital gap.

By Sharon McLoone, CNNMoney.com contributing writer

Gault models one of her designs. She sells her custom clothing online to customers around the U.S.

WASHINGTON (CNNMoney.com) -- Fast Internet access is a luxury most businesses take for granted these days, but in remote areas of the country, the staticky crackle of a dial-up modem connection remains a familiar sound. A $7.2 billion stimulus initiative aims to expand broadband access and speed up the modem's extinction.

Two federal agencies, the Commerce Department's National Telecommunications Information Administration (NTIA) and the Agriculture Department's Rural Utility Service, each landed billions from the Recovery Act to fund new broadband infrastructure projects. Applications are due this week for the first wave of grants and loans from those programs.

For entrepreneurs in rural areas, a broadband connection can be an economic lifeline. Alexis Gault lives in Asheville, a city of 74,000 at the mountainous western edge of North Carolina. After losing her $8 an hour job as a photographer's assistant, she decided to turn her part-time hobby into a full-time career. Gault launched Lush Life Originals, a custom clothes line she sells online.

Designer Alexis Gault relies on Internet access from a nonprofit local provider to keep her business connected to its customers.

She relies on a speedy Internet connection to send clients e-mails with high-resolution images, maintain her Web site, and keep up with her site's e-commerce. But it's not a connection she takes for granted: Gault's Internet provider is a local nonprofit, the Mountain Area Information Network (MAIN), that relies on grants and fundraising to supplement its service fees.

"Time is literally my money. If I'm not sewing, I'm not making money," Gault says. "If someone orders something and it's not in stock any more, I don't have to run to the library to use their broadband connection to update my Web site."

Charter Communications offer DSL (digital subscriber line) service in Gault's neighborhood, but she is not able to afford its higher monthly fees.

Wally Bowen, MAIN's executive director, sees a direct connection between Internet access and economic prosperity. "One thing that we've learned is that people started making significant progress in their lives when they started using the Internet," he says. "They were able to start new businesses, manage their health care insurance and medicine online, and get more job training."

MAIN has been operating as a nonprofit in North Carolina's rural mountains since 1996. The group got its start with an NTIA grant to build infrastructure to give the area's residents dial-up Internet access through a local phone call. MAIN also introduced Internet access at local public libraries and community centers.

In 2003, MAIN expanded to offer high-speed wireless connections. Today, the organization serves 1,200 dial-up subscribers in 14 counties, 400 wireless subscribers across four counties, and hosts some 450 Web sites. Outside of MAIN, residents face few choices. DSL lines and higher-speed broadband are available from larger firms in the town center and immediate outlying area, but not much further.

"Six out of 10 people who want our wireless broadband service can't get it," Bowen says.

He sees wireless technology, which get around the region's hollows and hills, as the best and most immediate broadband solution for residents. But there's very limited spectrum available for him to offer customers service, a problem he's looking to the Federal Communications Commission to fix. The FCC took action last year to free up more spectrum for situations like these, but it has yet to issue protocols on how technology should operate within the spectrum. Until it moves forward with those rules, none of the spectrum that was freed is available for use.

MAIN, working with several partners, is angling for a $50 million grant from the $7.2 billion stimulus funding pool for broadband projects. That coalition is looking to build an optical fiber network that would bring broadband access to residents in three counties. MAIN is also seeking a separate grant to build out wireless broadband to local public housing, community centers and fire stations.

Without the federal funds, MAIN can't afford to roll out those services. Things would remain "status quo," Bowen says.

That's an option the U.S. can't afford if it wants to retain its global lead as a technology innovator. America is now ranked 15th in the world on broadband access, according to the Organization for Economic Cooperation and Development. It was No. 1 in the mid-1990s.

The digital gap within the country is widening. More than two-thirds of U.S. households now subscribe to a broadband service, compared to just one-fifth five years ago, according to recent data from Leichtman Research Group. But in rural America, only 31% of residents have a broadband connection, according to the Pew Internet and American Life Project. The rural West leads in broadband connections, while the South is the worst laggard, census data says.

Sascha Meinrath, director of the Open Technology Initiative at Washington think tank New America Foundation, says lawmakers need to recognize that the state of the nation's broadband is an enormous, looming problem.

"Countries decades ago realized that you need to invest in highways if you want to have a modern economy," Meinrath says. "Those countries that didn't invest have been left behind. In the digital era, there will be those countries that don't invest and get left behind."

Do-it-yourself access

Not every region in need of a broadband buildout has turned to the government for money.

The city of Powell, Wyo., raised $6.5 million from private investors to build a high-speed fiber-to-the-home network for its 5,500 residents. The network took three years to build, and just launched in May. Qwest Communications (Q, Fortune 500) provides communications services in the area, but Logan says Qwest's connections are slower than the city's project.

"We've figured out an innovative way of funding this without taxpayers' money and without state, local or federal money," says Powell City Administrator Zane Logan.

TCT West, a regional communications company based in Basin, Wyo., is the city's service provider and has an exclusive contract with Powell for six years. "We're providing the infrastructure in the city, and we are giving TCT the ability to provide services and set rates," says Logan. "The idea was to keep businesses downtown and to attract more professional, technical-type businesses."

Logan has been down a similar path before. He was hired in 1992 as the city's electrical superintendent and worked to completely overhaul the local grid, from the substation to residents' houses. "It took 12 years, but one of the reasons I did that is because when a business comes to town they want to know who is your power company and how reliable is it," he says. "That got me to thinking about telecom."

He thinks the city's Internet gamble is already paying off: "Existing businesses here are expanding," Logan says. "People can stay at home and get as good and fast of a connection as in a big city."

Powell's broadband project has another economic fringe benefit: TCT West has been hiring Powell residents for customer service, installation and tech support.

Building a better map

The first step toward improving the nation's broadband infrastructure is finding out where the problem spots are. Some $350 million of the Recovery Act's $7.2 billion funding pool has been earmarked to map the country's broadband use and highlight which regions have high-quality access. The idea was put forward in a bill signed by President Bush last year, but the measure didn't allocate any funding for the initiative. The money showed up in President Obama's stimulus package.

Drew Clark, executive director of BroadbandCensus.com, a trade publication tracking the broadband stimulus funding, says better mapping data could be a boon for small businesses.

"A public and transparent map will be useful to helping businesses invest," he says. "You want to locate your business where there is broadband or where there's likely to be broadband. You need to know where the interstate highway type of connections are and where the dirt roads are."

The Federal Communications Commission has also been charged with presenting lawmakers with a national broadband plan by Feb. 17, 2010. One of its goals is to get affordable broadband to as many people as possible. The FCC is taking a flood of public comments on the matter and must digest them as part of putting together its recommendations. The issues it is grappling with include defining terms like "affordable broadband" and "underserved."

"We can restore economic vitality to underserved areas that for decades have not had the benefit of this IT knowledge base," says MAIN's Bowen. "People like [Microsoft cofounder] Bill Gates and others in Silicon Valley are bright people, but they had access to social capital to incubate and nurture them. The social capital has been drained out of rural America for several decades now. We can fix that."

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An '09 Turnaround? Not Likely

NEW YORK (Fortune) -- At first glance, the fourth-quarter GDP report released earlier today produced a moderate surprise in that it didn't show a contraction quite as deep as had generally been expected by most private economists. The so-called consensus forecast, based on various surveys, had been looking for a decline of around 5.5%. However, there is little overall reason to cheer simply because the economy contracted at a rate of "only" 3.8% last quarter (following a 0.5% decline in the third quarter), according to the Commerce Department's preliminary calculations.

Here's some key reasons for which, in reality, the data offer very little encouragement for the medium-term prospects of the economy.

1. The consumer pullback is severe and enduring. Personal consumption declined at a rate of 3.5%, which alone subtracted two and a half percentage points from GDP last quarter and followed another sizable decline of 3.8% in the prior quarter. Back-to-back declines of that magnitude are very rare and can only be compared to the cumulative decline in spending in the first two quarters of 1980, when the economy was experiencing a particularly sharp and deep (although short-lived) recession.

By way of comparison, during the historically severe and long recession of 1981-82, consumption contracted in only a single quarter by a more moderate 3%. In the 1990-91 recession, spending fell by 2.8% and 1.7% in two consecutive quarters, while there was no single-quarter drop during the 2001 recession.

2. Warehouses are filling up at a fast rate. A major reason for which the decline in GDP in the fourth quarter was contained is the sharp buildup in the rate of inventory accumulation, to the tune of $36 billion, which added 1.3 percentage points to GDP growth. Such a sizable rise in inventory accumulation in the midst of a major retrenchment in consumer spending does not bode well for growth in the early part of this year, as companies are likely to cut back on production further as they meet the weak consumer demand by drawing down on their inventory levels.

3. Companies have slashed their budgets. Capital spending, one of the key pillars of economic activity in normal times, appears to be caving in precipitously, consistent with the tone of the broader economic and financial environment in recent quarters. It is certainly true that capital spending is a highly cyclical component of GDP and tends to pull back quickly in periods of economic downturn. However, once again, it is the magnitude of the decline in the fourth quarter (19.1%) that is troubling. If that number stands after the subsequent revisions (or, if it is revised lower still), it will exceed the 18.8% contraction in capital spending during the second quarter of the infamous 1980 recession.

4. The numbers may get worse. Finally, it is important to remember that today's GDP number is only a preliminary estimate, subject to two back-to-back revisions in late February and late March, as the Commerce Department gathers more complete data for the various components. Recent history shows a strong pattern of very substantial revisions to the preliminary GDP estimate and, in that light, a considerable risk exists that today's 3.8% number may be revised somewhat lower in the end rather than higher.

The bottom line from the fourth-quarter GDP report is that it has already set the stage for more contraction in economic activity in the first quarter of 2009, as consumer spending remains weak, capital spending continues to shrink and last quarter's inventory bulge will probably not be repeated again. One slight consolation is that consumer spending is unlikely to register such a big decline as in the second half of last year, given that some pent-up demand will help contain the pace of further retrenchment.

There was little reason, based on the fourth-quarter GDP report, to alter expectations regarding the basic trajectory of economic activity later in the year. While the pace of contraction could moderate somewhat as the year progresses, given the dynamic already in place and a still unfolding banking crisis around us, the prospects for any meaningful turnaround before the end of the year remain pretty slim.